What Is Net Worth?

Net worth is the total value of your assets minus your liabilities. It provides a snapshot of your financial health and helps you measure your progress toward financial goals. Essentially, net worth is what would be left over if you cashed out all your assets and paid off your debts.

Net Worth vs. Income

Both net worth and income are indicators of financial health, but they measure different things. Net worth shows the difference between your assets and liabilities, while income is what you make from wages, investments, business income, passive income, and benefits like Social Security or pensions.

How to Calculate Your Net Worth

To calculate your net worth, follow these steps:

1. Add Up Your Assets: List your assets, including bank account balances, retirement savings, and investments. Estimate the current market value of your home and vehicles.
2. List Your Liabilities: Itemize your current debts, including your mortgage, car loan, credit card balances, student loans, and personal loans.
3. Subtract Liabilities From Assets: Subtract your total liabilities from your total assets to get your net worth. A positive net worth means you own more than you owe, while a negative net worth suggests you have more debts than assets.

How Net Worth Impacts Credit

Net worth has no direct impact on your credit score. However, it can affect your access to credit. Lenders may calculate your net worth as part of the home loan approval process to understand your ability to repay a loan. Tracking your net worth can also offer insight into your relationship with credit.

What Should Your Net Worth Be?

There’s no magic number for the right net worth. Generally, a positive net worth is better than a negative one, and a higher net worth is preferable. Net worth tends to build over time as savings accumulate and assets appreciate in value.

How to Increase Your Net Worth

Increasing your net worth can be a lifelong project. Here are some tips to help you grow your net worth over the long haul:

• Pay Down Debt: Reducing high-interest credit card debt and other types of debt can save you money in interest charges and decrease your liabilities.
• Increase Your Income: More income gives you more money to save and invest. Consider taking on outside work or looking for passive income opportunities.
• Find More Ways to Save: Saving money increases your assets and helps you avoid debt. Work on a budget, reduce expenses, and build an emergency fund.
• Contribute Toward Retirement: Set goals for funding your retirement and stick to them. Contributing to your employer’s 401(k) plan and opening an IRA are good places to start.
• Invest: Buying stocks or other investments can help increase your net worth as these assets appreciate. Investing in a home can also increase your net worth as you pay down your mortgage and your home appreciates in value.

The Bottom Line

Although net worth isn’t an absolute measure of financial health, it can help you gauge how your assets stack up against your debts and how your finances are progressing toward long-term goals. A lifetime of good habits like saving, investing, and paying off debt will ideally lead to a higher net worth.

Keep an eye on your net worth to identify potential problems and course-correct if necessary. Together with strategies for budgeting, investing, career development, and monitoring credit, tracking your net worth helps you evaluate and celebrate your financial progress.